Department of Accounting and Finance

Faculty of Humanities, Social & Management Sciences

Elizade University, Ilara-Mokin, Ondo State

COURSE TITLE: BANKRUPTCY, LIQUIDATION, EXECUTORSHIP AND TRUSTEESHIP

COURSE CODE: ACF 410
COURSE LECTURERS: DR. S.O. OGBEIDE

WEEK TOPICS LEARNING OBJECTIVES

1 Registration
Students should be able to:
 Understand the meaning of bankruptcy
 Explain Acts of Bankruptcy
2 Bankruptcy  List debtors that cannot be made bankrupt
 State the purposes of the Bankruptcy Acts

Students should be able to:

 State the purposes of Bankruptcy Acts
 Explain disqualification of Bankruptcy Acts (Section
126(1)
 Explain Bankruptcy proceedings.
3  Explain statement of affairs of a bankrupt
 Explain the difference between balance sheet
| Purposes of Bankruptcy Act
(statement of financial position and statement of affairs
4
 Explain meaning of deficiency account
 Explain meaning of surplus account.
 List and explain schedules that accompany statement of
affairs.

Students should be able to:

 Explain pro-format of:
i. Statement of affairs of a bankrupt
5 Preparation of statement of Affairs,
ii. Deficiency account
| Deficiency Account and Surplus
iii. Surplus account
6 Account
 Computation of questions using pro-format of
statement of affairs, deficiency and/or surplus account.

Students should be able to know:

 Meaning of liquidation (Section 7(1) of the Act
7  List and explain modes of winding up or liquidation
| Liquidation
8  Consequences of winding up

 Appointment of special manager

Students should know:
 To prepare statement of affairs of a company on
liquidation
9 Statement of affairs on Liquidation
 Prepare deficiency account on liquidation of a company
 Prepare surplus account of a company on liquidation

Students should know:

 How to prepare statement of affairs on liquidation with
10 Computation of Liquidation Questions any question
 How to prepare deficiency or surplus account on
liquidation
11 Executorship Students should be able to:
 Know the meaning of executorship.

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  Know the meaning of:
i. Will
ii. Testator/testatrix
iii. Intestacy
iv. Partial intestacy
v. Executor/executrix
vi. Administrator/ administratix
vii. Codicil
viii. Real and personal property
ix. Real property or realty
x. Bequest
xi. Devise and devisee
xii. Legacy and legatee
xiii. Residue
xiv. Probate
xv. Personal representative
xvi. Gift intervivos
xvii. Preparing account of an executor

Students should know:

 Meaning of a trust
 Creation of trust.
 Requirement for creation of trust
 Person that can create trust
12  Who is a trustee?
| Trusteeship  Trustee appointment
13  Maximum number of trustees
 Removal of trustees
 Remuneration of a trustee
 Duties of a trustee
 Power of trustee
 Liability of a trustee
14 Revision/Lecture Free
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| Semester Examination
16

Course Evaluation
 CA
 Attendance: 10 marks
 Test: 20 marks
 Assignment: 10 marks
Total 40 marks
 Exam: 60 marks
 Total: CA + Exam 100 marks

DEFINITION OF BANKRUPTCY

Bankruptcy can be defined as the legal declaration of insolvency. Insolvency is the inability of a

debtor to meet his obligation as they fall due. Bankruptcy proceedings usually involves a court of

competent jurisdiction appointing an officer to take over the debtor’s assets, realizing them and

distributing the proceeds thereof rateably and equitably among his creditors to the extent that assets

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permit and subject to existing priorities. The court of competent jurisdiction is the Federal High

Court.

Acts of Bankruptcy

This is an act of default on the part of the debtor which is deemed to be evidence of his insolvent.

The Act regulating bankruptcy issues in Nigeria is the Bankruptcy Act of 1979. According to

section.1 of the bankruptcy Act of 1979, a debtor commits an act of bankruptcy in each of the

following cases:

i. If a creditor has obtained a final judgment or final order against him for any amount and

execution thereon has not been stayed, has a bankruptcy notice serve on him and he

does not within 14 days comply with the notice or put forward a counter claim, set-off

or cross demand which equals or exceeds the amount of the debts.

ii. If the execution against him has been levied by seizure of his goods under process in an

action or proceedings in the court, and the goods have either been sold or held by the

bailiff for 21 days.

iii. If he files in the court a declaration of his inability to pay his debts or presents a

bankruptcy petition against himself.

Condition necessary for a creditor‘s bankruptcy petition to hold

i. If the debts owe by the debtor is not less than N2000 or if two or more creditor join

in the in the petitioning of the debtor.

ii. The debt is a liquidated sum payable either immediately or at some certain fuure

time.

iii. The act of bankruptcy on which the petition is based has occurred within 3 months

before the presentation of the petition.

Debtors that cannot be made bankrupt

i. Infant
ii. Corporate bodies
iii. Deceased persons
iv. The insane
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 v. Alens

Purpose of the Bankruptcy

The purpose of instituting the Bankruptcy Act of 1979 is to make provisions for declaring as

bankrupt any person who cannot pay his debts of a specified amount and to disqualify him from

holding certain elective and other public offices or from practicing any regulated profession (except

as an employee).

The objects of the bankruptcy procedures are:

(a) To divide the debtor’s available property fairly and equitably amongst his creditors.

(b) To relieve the debtor from the excess of his liabilities over his assets (i.e deficiency) to

enable him make a fresh start after his discharge, and

(c) To carry out investigation into the reasons for his insolvency order to discourage others

from making his mistakes.

Disqualifications of Bankrupt [Section 126(1)]

These can be said to the effect of bankruptcy in that the person adjudged bankrupt under the Act is

disqualified from:

(a) Being elected to the office of the President or Vice-President, Governor or Deputy

Governor;

(b) Being elected to or sitting or voting in, either House of National Assembly or in a State of

Assembly;

(c) Being elected to or sitting or voting, any local government council in any State in the

Federation or the Federal Capital Territory, Abuja;

(d) Being appointed to, or sitting or voting in, any governing board (Whosever known or

describe) of any Statutory Corporation or any other Statutory body (whether corporate or

unincorporated) or, as provided by section 253 of CAMA, of any company as defined in

that Section;

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(e) Being appointed or acting as a justice of the peace;

(f) Being appointed or acting as a trustee of a trust estate;

(g) Being admitted to practice any profession for the time regulated by law on his own or in

partnership or in any other form of association (other than as an employee) with any other

person.

These disabilities suffered by the bankrupt are removed and ceased if and when:

a) The adjudication of bankruptcy against him is annulled; or

b) He is automatically discharged pursuant to the Act; or

c) He obtains from the court his discharged with a certificate to the effect that his bankruptcy

was caused by misfortune without any misconduct on his part.

Bankruptcy Proceedings

The proceedings in bankruptcy can be summarized as follows:

1. Presentation to the Court (Of competent jurisdiction) of a bankruptcy petition against the

debtor. As explained earlier, the petition may be brought by an aggrieved creditor or a

group of creditors or even the debtor himself.

2. On hearing the petition, the court may dismiss it if it is not satisfied with the facts. If it is

satisfied, then a receiving order will be made against the debtor.

3. On the making of the receiving order, the property or estate of the debtor is placed under the

custody and control of the Official Receiver. This makes the debtor to lose possession (and

not title) of his assets and all legal actions against the property or person of the debtor are

automatically stayed. This does not mean that a secured creditor cannot realize or otherwise

deal with his security, if he has the power. Note that, the receiving order does not make the

debtor bankrupt but places his property under the protection of the court pending the

outcome of the proceedings.

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 4. The debtor will submit a Statement of Affairs in the prescribed form supported with a sworn

affidavit to the Official Receiver. This should be done within 7 days of the receiving order

if made on the debtor’s own petition or within 14 days, if made on a creditor’s petition.

Note that:

a) At times the court may appoint the Official Receiver to be Interim receiver pending the

making of the receiving order in order to protect the estate of the debtor.

b) The court on the application of the Official Receiver or any creditor, may appoint a Special

manager whose major duty is to manage the estate or the business of the debtor pending the

appointment of a trustee.

The statement of affairs is usually made up as on the date of the receiving – order and accompanied

by detailed schedules. In most cases, the statement is also accompanied by the deficiency (or

surplus Account that explains how the deficiency (or the surplus) in the statement has arisen.

Notice that, the deficiency (or surplus) Account is expected to commence on a date 12 months

before the date of the receiving order or such other time as the Official Receiver may have fixed.

The statement as already explained, shows amongst others, the insolvent debtor’s assets and

liabilities. Assets are estimated at their realizable value and placed at the left hand side of a the

statement while the liabilities to be paid out of these assets are placed on the other side.

In an inner column of the statement are the particulars of secured debts and the securities in relation

to them. Note that, these assets used as securities at not shown with the other assets again.

If the liabilities of the debtor exceed his assets this will give rise to an estimated deficiency and if

the reverse is the case, then there will be a surplus. The deficiency or surplus must be explained in

the account that accompanied statement.

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Although, a Statement of Affairs looks in some respects, like a Balance sheet, there are still some

fundamental differences like the following:

Balance Sheet Statement of Affairs

1) Assets are recorded at cost or valuation 1) Assets are recorded at the estimated realizable

value.

2) Assets are divided into fixed assets and current 2) Assets are divided into those that are
assets specifically pledged (that is, used as collateral

securities) and those not specifically pledged.

3) Liabilities are classified into Current and Long 3) Liabilities are divided into secured, unsecured

Term Liabilities. and preferential liabilities.

4) It is usually prepared for a going-concern 4) This is prepared on a break-up or winding up

basis.

5) There is no order of priority of claims. 5) The order of priority of claims must be strictly

adhered to during payment of creditors.

6) A Profit and Loss Account usually 6) This is usually accompanied by a Deficiency or

accompanied a Balance Sheet Surplus Account.

7) Preferential Creditors are included in the total 7) Preferential Creditors are deduced from the

of the liabilities. assets.

8) This shows Capital, Profit or Loss and 8) These items are excluded from this statement.
Drawings.

9) Personal Assets and Liabilities are not included 9) There is no distinction between the business

assets and liabilities and personal assets and

liabilities.

Preparation a Statement of Affairs

The following is one of the methods that can be used to prepare the Statement of Affairs as

explained by Douglas Garbutt (1976: 2606)

1) A rough statement should be prepared with assets on the right hand side and liabilities on

the left in ordinary Balance Sheet form.

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2) Each item must appear on the same side in the statement of Affairs of Deficiency Account

as it appears in the rough Balance Sheet.

The estimated value of each will appear on the right-hand side of the Statement of Affairs.

The estimated amount of each liability will appear on the left hand side of the Statement of Affairs.

The estimated loss (the excess of book value over estimated realizable value of an asset, or the

increase in the amount of liability over the book value) will appear on the right-hand side of the

Deficiency Account.

3) Any item not in the rough Balance Sheet must appear both in the Statement of Affairs and

in the Deficiency Account, but on reverse sides; in other words, there must be double entry

therefore E.

4) The capital of the insolvent debtor is shown in the Deficiency Account on the same side as

it appears in the Balance Sheet although there may be some adjustments in relation to the

Capital.

5) The balance of the Statement of Affairs and Deficiency Account will be equal and closed by

a cross transfer.

Schedules or Lists that Accompany Statement of Affairs

The lists are labeled, Lists A to K and list L

List A Unsecured Creditors

“ B Fully Secured Creditors

“ C Creditors Partly Secured

“ D Liabilities of Debtors on Bills Discounted other than his Own Acceptance for

value.

“ E Contingent or other liabilities

“ F Creditors for Rent, e.t.c., Recoverable by Distress

“ G Preferential Creditors for Rent Taxes and Wages

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“ H Property or

“ I Debts due to

“ J Bills of Exchange Assets.

“ K Deficiency or (Sure account)

“ L In substitution for such of the Sheet named A – J as will have to be returned

black.

List A: Unsecured Creditors

This list contains the name, address and occupation of each creditor, the amount of the debt, when

contracted and the consideration given. The Creditors here have merely a claim upon the general

assets of the estate (i.e. unsecured).

All liabilities which cannot be accommodated in the other lists or schedules are included here.

Examples are bills payable on which the debtor is liable as acceptor for value, unsecured bank

overdrafts, the balance of debts that exceed the preferential limit and balances of the rent not

recoverable by distress.

The reader should please note that deferred or postponed Creditors are unsecured creditors although

the law does not allow them to recover anything from the estate of the bankrupt until all other

unsecured creditors are paid in full.

Examples of deferred Creditors are:

1) A wife who lent money to her husband for the purpose of his trade or business or money

lent by the husband to his wife in similar circumstances.

2) Creditors who loaned out money to a bankrupt or insolvent debtor at a rate of interest

varying with the profits or creditor who receive a share in the profit instead of interest.

3) The vendor of goodwill of a business who is to receive as consideration a share of profits or

the vendor has to be paid by a way of annuity.

4) Interest on debts that is excess of 5% per annum

5) The claim of a joint creditor against the separate estate of a bankrupt partner.

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List B: Fully Secured Creditor

This contains the names of Creditors who hold a covering security for their debts such as a

mortgage, charge or lien upon any property of the debtor. It also contains particulars of the security

held, the date when the security was given, the estimated value of the security and the estimated

surplus (if any). A secured creditor has the power to realize his security and any surplus arising

therefrom must be submitted to the estate of the bankrupt. This surplus is transferred to the right-

hand side of the Statement of Affairs as part of the assets. If there is a shortfall (where the amount

realized or expected to be realized is less than the debt) this should rank as unsecured debt and the

creditor becomes a partly secured creditor. In some instances, a secured creditor may surrender the

security instead of realizing it) and prove for the whole debt.

Where there is more than one charge (for example first, second, third charges e.t.c) on the same

property in relation to different debts, the surplus from the first debt is transferred to the second and

any surplus therefrom is carried forward to the third on and on like that

(i) Note that interest on mortgage is payable up to the date of repayment up two the date of

repayment and both the principal and interest are covered by the security.

(ii) In a situation where the security given by the debtor does not belong to him but to the third

party the creditor now proves for the full amount because he in now unsecured in respect of

the bankrupt estate.

Fully secured creditors are shown on the liabilities side of the statement of affairs and the estimated

realizable value of the security is deducted from the debt owed them.

List C: Creditors Partly Secured

This list contains particulars of creditors who have a charge on some part of the debtor’s property

which when realize will pay off only a portion of the debt. The shortfall arising therefrom must

rank against the estate for dividend. On the Statement of Affairs, partly secured creditors are shown

on the liability side and the security shown as a deduction. The shortfall arising therefrom extended

to the ranking column.

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List D: Liabilities of Debtors on Bills Discounted other than his Acceptance for value

On this list are particulars of all immatured bills of exchange to which the debtor is a party as either

drawer or endorser. Therefore, all immatured bills of exchange receivable discounted or endorsed

onto creditors must be included on this list. However, only those that are not expected to be met at

maturity will be shown as liabilities to rank for dividend in the estate although the total will be

shown in the column for gross liabilities. As explained earlier, any amount of the bill expected to

rank must be extended and also shown in the Deficiency A count as an expected loss.

Accommodation bills are also included on this list but each of them needs to be properly examined

to know the precise nature before the correct treatment can be given.

You will recall that liabilities on bills payable accepted by the debtor for to value are not included

here but as part of unsecured creditors (List A).

List E: Contingent or Other Liabilities

This list includes liabilities like uncalled Capital on partly paid fully paid on suretyship (for others),

liabilities in respect of any uncompleted contracts or a repairing lease and amount due to postponed

of deferred creditors. Note that, deferred creditor have been explained under unsecured creditors

(List A).

List F: Creditors for Rent, etc. Receivable by Distress

According to section 30 of the Act, the landlord or any other person whom any rent is due from the

bankrupt may distain upon the good or effects of the bankrupt for the rent due to him before or after

the commencement of the bankruptcy then any rent in arrear up to maximum of six months, rent

accrued up to the date of the adjudication order can be recovered. The surplus of rent (for which the

distress is not available) now ranks for dividend as an unsecure creditor.

If the distain is within three months next before the date of the receiving the debts to which priority

is given shall be a first charge of the goods or effects so distressed or the proceeds of the sale

thereof.

List C: Preferential Creditors for Rates, Taxes and Wage (S. 36)

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The following debts are to be paid in priority to all other debts who distributing the property of a

bankrupt.

a) All debts due by the bankrupt to the state at the date of the receiving order and having

become due and payable within twelve months next before that time.

b) All wages or salary (including commission provided that the amount thereof is fixed or

ascertainable at the data of the receiving order) of any employee in respect of service

rendered to the bankrupt during four months next before the date of the receiving order, not

exceeding N300 (per person).

The foregoing debts shall rank equally between themselves as shall be paid in full. Where the

property of the bankrupt is insufficient to meet them then they shall abate in equal proportion

between themselves.

In the Statement of Affairs, preferential debts are deducted from the total assets instead of

extending them into the ranking column.

List H: Property of Debtor

This list contains all the belongings of the bankrupt in form of goods, money, real and personal

property (wherever they may be) which are available for payment of debts.

The property according to section 41 comprise the following particulars:

a) All such property as may belong to or be vested in the bankrupt at the commencement of

the bankruptcy or may be acquired by or devolve on him before his discharge.

b) The capacity to exercise and to take proceedings for exercising all such powers in or over or

in respect of property as might have been exercised by the bankrupt for his own benefit at

the commencement of his bankruptcy or before his discharge;

c) All goods being at the commencement of the bankruptcy in the possession, order or

disposition of the bankrupt, in his trade or business by the consent and permission of the

true owner, under such circumstances that he is the reputed owner thereof.

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Provided that things in action other than debts due or growing due to the bankrupt in the course of

his trade or business shall not be deemed good within the meaning of this section.

Assets pledged or mortgaged as securities for debts or loans should not appear with other assets in

the Statement of Affairs instead they should appear under such debt or loan as value of security on

the liabilities side.

Note that, property of the debtor includes other assets such as life insurance policy (the sun-ender

value), reversionary interest, leases, stocks and shares, jewellery and in the case of the bankruptcy

of a partnership the surplus (if any) from the partners’ separate estates.

Property Retained by Bankrupt

Section 41(2) excludes the following property from those that can be used to pay creditors:

a) Property held by bankrupt on trust for any other person;

b) The tools (if any) of his trade and necessary wearing apparel and bedding of himself and his

family dependent on an residing with him, to a value, inclusive of tools and apparel and

bedding, not exceeding N1,000 in the whole.

ACF 410—BANKRUPTCY, LIQUIDATION, TRUSTEESHIP AND RECEIVERSHIP

List I: Debts Due to the Estate

These debts are normally classified into good, doubtful and bad. Those that are doubtful have to be

estimated. The good and the estimated value of the doubtful are regarded as assets in the Statement

of Affairs.

List J: Bills of Exchange, Promissory Notes, e.t.c regarded as Assets

This list contains particulars of all bills of exchange, promissory notes, etc. held by the debtor and

regarded as his assets.

List K: The Deficiency (or Surplus) Account

This list serves to explain by means of figures how the deficiency or the surplus in the Statement

Affairs has risen. Like all Accounts, the Deficiency Account has two sides, left-hand side (i.e Debt

side) and right-hand side (i.e credit side).

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On the debt side are the following items:

i) The capital (if any) of the bankrupt on a given date. This is at times described as the

excess of assets over liabilities.

ii) Net profits (if any) arising from carrying on business to the date of the receiving order,

after deducting usually trade expenses.

iii) Income or profits from other sources. For example, estimated gains on realization of

assets.

iv) Gifts from relations and others

On the credit sides:

i) The excess of liabilities over assets (i.e. negative capacity) of the bankrupt of on a given

date (if any).

ii) Net loss (if any) for the year to the date of the receiving order after charging usual trade

expenses.

iii) Expenses incurred other than usual trade expenses, viz household and personal expenses

of self and wife and children. These expenses are usually represented by Drawings.

iv) Estimated losses on realization of assets e.g.

a) Bad debts

b) Depreciation of machinery

c) Depreciation of trade fixtures, fittings.

v) Other losses and expenses (if any) including those for which no consideration is

received.

a) Gambling or losses on investment;

b) The difference between premium paid on life policies and the surrender value of

such policies;

c) Damages and costs in actions at law;

d) Loss through dishonoured bills and accommodation bills expected to rank.

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 vi) Surplus (if any) as per Statement of Affairs. If everything goes on well, at the end of the

day, the Deficiency (or Surplus) Account must balance.

List L: In Substitution for such of the sheets named A – J as will have to returned Blank

This list helps to obviate the need to file many blank forms as regards small bankruptcies. What the

debtor does here is to fill in the letter of such form, and, writes the word nil opposite to the forms

that is returned blank.

Front Sheet or Summary: The Statement of Affairs

In the words of Garbutt (1976: 2017) the totals of the various list have to be transferred to the

“Front Sheet” or Summary. The assets on the lists H, I, J and H are copied in details followed by

any Surplus front the hands of fully secured creditors to give the “gross” assets.

The proper amounts of the liabilities which are on lists A to E and extended into the column titled

“Expected to Rank”, Note that liabilities on lists F and G are not extended into the Ranking Column

but the total estimated from the gross assets to give net assets. To arrive at the estimated deficiency

or surplus in the statement, the net assets total is compared with the total of the liabilities that are to

rank.

There is a column on the furthermost part of the left-hand side of the statement called “Gross

liabilities column”. This is where all liabilities, whatever the nature are inserted. This column is

only of supplementary nature.

Pro-forma Statement of Affairs (in Statutory Form)

In the High Court of Justice

In bankruptcy Re …………………………………………

TO THE DEBTOR – You are required to fill up carefully and accurately this sheet, and such of the

several sheets A, B, C, D, E, F, G, H, I, J and K as are applicable showing the state of your affairs

15
 of the day on which the Receiving Order was made against you, viz the …………..… day of

……………..19………..

Such Sheets when filled up will constitute your Statement of Affairs and must be verified by oath

declaration.

Gross liabilities Liabilities (as stated and Expected Assets (as stated and estimated by Estimated

N Estimated by debtor) to Rank N Debtor) to produce

X Unsecured Creditors as per list X Property as per List (H), viz X

(A)

X Creditors Fully Secured as per (a) Cash at Bankers X

List (B) (b) Cash in hand X

Estimated value of securities X (c) Cash deposited with Solicitors

Surplus X for cost of Petition X

Less amount thereof earned to (d) Stock-in-trade (cost N) X

sheet (C) (e) Machinery X

Balance thereof to contra X (f) Trade fixtures, fittings and

Creditors Party Secured, as per utensils, etc X

list C (g) Farming stock X

Less estimated value of Securities (h) Growing crops and tenant right X

Liabilities on Bills discounted (i) Furniture X

other than debtor’s own (j) Life policies X

acceptances for value as per list (k) Stocks and Shares X

(D) viz- (l) Reversionary and other interests

On Accommodation Bills as under wills X

Drawer, Acceptor or indorse (m) Other property, viz- Total as per

On other Bills as Drawer or list (H) X

indorser X (n) Book Debts as per list (I) viz- X

Of which it is expected will rank Good N

against the estate for dividend Doubtful X

Contingent or other Liabilities as Bad X

per list (E) X Estimated to produce Bills of X

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 Of which it is expected will rank Exchange or other similar securities

against the estate for dividend on hand as per list (J) NX

Creditors for rent etc. N Estimated to produce

recoverable by distress as per list Surplus from securities in the hands

(F) X fully secured (per control)

Creditors for rates, taxes, wages, Gross or total Assets

etc payable in full as per list (G) Deduct Creditors for disrwable rent, X

X and for preferential rates, taxes and

Deduced contra X wages etc (per contra) Net Assets

Surplus explained in Statement Deficiency explained in Statement X

(K) (X) X

Pro-forma Deficiency for Surplus Account

N N

i) Excess of Assets over liabilities on the ………..day X i) Excess of liabilities over Assets on the X

of……….. (if any) …….day of…… (if any)

ii)Net profit (if any) arising from carrying on business from the X ii) Net loss (if any) arising from carrying X
day……….of………to date of Receiving Order, after on business from the……day of……..

deducing usual trade Expenses to date of Receiving Order

iii) Income or profit from other sources (if any) since X iii) Expenses other than usual trade X

the…….day of……… e.g. gains on assets expenses (or Drawing Dividend paid)

iv) Gifts (and Bequests) from relations and others X iv) Estimated Losses on Assets X

v)Deficiency (if any) as per Statement Affairs. X v) Surplus (if any) as per Statement Affairs X

X X

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Notes:

1. This date should be 12 months before the date of the Receiving Order, or such other time as

Official Receiver may have fixed.

2. These figures should agree.

Adjustment of Profits and Losses

At times, the net profit or loss made by the bankrupt from carrying on his business is given-after

charging interest on capital. This interest must be disallowed by adding it back to the net profit or

subtracting it from the net loss so that it doesn’t appear in the Deficiency Account.

Illustrative Questions

Mark Anthony got into financial difficulties and was unable to meet his obligation

On 31st December 1996, a Recovering Order was made against him when his financial affairs were

as follows:

N N N

Capital Freehold building 45,000

At 1 Jan, 1996 59,220 Plant and machinery 37,500

Loss for the year 9,600 Furniture & Fittings 16,800

Drawings 13,500 (23,100) Motor Vehicles 18,300

36,120 Stock 13,000

Mortgage on freehold buildings 36,000 Debtors 27,420

Bank Overdraft 16,500 Bills receivable 7,200

(Secured) Cash at bank 3,300

Creditors 57,750 Cash in hand 270

Bills payable 22,500

168,870 168,870

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The following additional information is given on the above financial Affairs, Creditors comprised:

a) Trade creditors 36,300

PAYE deduction (1995 N2100; 1996 N1,500) 3,600

Income tax (1995 N900; N1996 N1,350) 2,250

Rates (15 months to 31 December, 1996) 450

Sundry creditors 15,150

57,750

Sundry Creditors included six months wages due to the book-keeper at the rate of N125 per

month.

b) The assets are estimated to be realized as follows:

i) Freehold land and buildings 43,500

ii) Plant and Machinery 20,700

iii) Furniture and Fittings 10,200

iv) Motor Vehicles 7,800

c) The stock is estimated to produce 10,350

d) The debtor is made up of:

Goods debts 15,000

Doubtful debts 7,500 estimated to produce 4,800

Bad debts 4,920 estimated to produce nil

27,400

e) The bank overdraft was secured on the life policy of Mark, the surrender value of which is

N11,700.

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f) There was a contingent liability of N10,500 in respect of bills discounted of this amount,

N4,200 would not be honoured on maturity.

g) The bills receivable are expected to produce N4,650.

You are required to prepare the Statement of Affairs and Deficiency Account for presentation to a

meeting of creditors.

Mark Anthony

Statement of Affairs as at 31st December, 1996

Gross Liabilities Expected to Assets Estimated to

Liabilities Rank produces

N N N N

76,740 Unsecured Creditors 76,740 Cash in hand 270

(w1)

36,000 Fully Secured 36,000 Cash at bank 3,200

Creditors

Estimated of 43,500 Plant and Machinery (book 20,700

securities value N37,500)

Surplus to Contra 7,500 Furniture & Fittings (Books 10,200

value N16,800)

16,500 Partly secured 16,500 Motor vehicle (book value 7,500

creditors N8,500

Estimated value of 11,700 4,800 Stock (cost N13,060) 10,350

security

4200 Liabilities on bills

10,500 Receivable 4,200 Debtors goods 15,000

discounted

Preferential creditors Doubtful 7,500

3,510 Deducted contra 3,510 Bad 4,920

12,420

20
 Estimated to produce

Bill receivable (book value

N7,200) 4,650

Surplus from fully – secured

Creditors 7,500

Gross (or Total) Assets Less 84,570

Preferential

Creditors

Net Assets 3,510

Deficiency 81,060

4,680

143,250 85,740 85,740

Deficiency Account

N N

Excess of assets over liabilities Net loss for 1996 9,600

At 1 Jan. 1996 Drawings 13,500

Business 59,220 Estimated losses on Assets

Private (life policy) -11,700

Deficiency per statement 4,680 Stock 2,750

Plant and Machinery 16,800

Furniture & Fittings 6,600

21
 Motor Vehicles 10,600

Bills Receivable 2,550

Bad debts 7,620

Other losses and expenses

Loss on bills discounted 4,200

75,600 75,600

Working N

(w1) Unsecured and Preferential Creditors

Unsecured Preferential

N N

Trade Creditor 36,300 -

PAYE deduction 2,100 1,500

Income tax 900 1,350

90 360
Rates ( of N450) ( of N450)

Sundry

- Wages of book-keeper for a month restricted to N300

- Others (ranked as unsecured) 300

14,850

54,240 3,510

Bills payable 22,500 3,510

76,740

Question 2

a) When is an individual said to have committed an act of bankruptcy under Bankrupt Act of

1979? (3 marks)

b) Mr. Johnbull, a sole trader filed his own petition in bankruptcy, his balance sheet as at 31 st

of March, 2001, the date of receiving the order is as follows.

Assets

22
Freehold premises 40,000

Furniture and equipment 30,000

Stock 10,000

Trade debtors 14,000

Bank balance 2,400

Cash in hand 800

97,200

Liabilities

Capital 20,000

Profit for the year 8,000

28,000

Less Drawings 4,000

24,000

Trade creditors 43,200

Bank overdraft (secured on freehold) 30,000

97,200

Additional Information given is as follows:

The business assets are estimated to realize the following:

N’000

Freehold premise 53,000

Furniture and equipment 7,200

Stock 8,400

Trade debtors 10,000

Bank balance 2,400

2. Trade Creditors included on amount of N3,000 regarded as preferential

3. Mr. Johnbull’s personal assets include:

23
 Motor car valued @ N4,000,000

Savings accounts with ALAWIYE Community Bank N1,000,000 and Household equipment

valued at N700,000. His personal liabilities are as followed:

Due to domestic staff – N400,000 and N1,000,000 for unsuccessful football forecast due to

his pool agent.

4. The value of his personal assets and liabilities has remained unchanged since 1999.

Required:

i. Prepare a statement of affairs as at 31st of March 2001

ii. A Deficiency / Surplus Account to accompany the Statement of Affairs. (7 marks)

[ICAN Nov. 2001. Question 5]

Suggested Solution

1) Acts of Bankruptcy

An individual who is a debtor in this context is said to have committed an act bankruptcy in each of

the following cases:

a) Where a creditor has obtained a final judgement or order against the debtor for an amount

due and the debtor fails to pay or settle the creditor within fourteen days of service of the

notice.

b) Where an execution was levied on the debtor by seizure of his goods under process in an

action or proceedings in the court and the goods are either sold or held by the bailiff for

twenty-one days.

c) Where the debtor files in the court a declaration of his inability to pay his or present a

bankruptcy petition against himself.

24
Mr. Johnbull

Statement of Affairs

As at 31st March, 2001

Gross Liabilities Expected to Assets Estimated to

Liabilities Rank produces

N’000 N’000 N’000 N’0000

44,597 Unsecured Creditor 44,597 Cash in hand 800

(w3)

30,000 Fully Secured 30,000 Cash at bank (w1) 3,5900

Creditors

Estimated realizable Furniture & Fittings 7,900

(w2)

Value of security 52,000 Motor car 4,000

Surplus to Contra 22,000 Stock (cost 8,400

N10,000,000)

Trade debtors 10,000

3 Preferential Creditors

Deducted contra 3 Surplus from fully

secured

Creditors 22,000

Gross (Total) Assets 57,800

Surplus 13,200 Less Preferential 3

Creditors

74,600 57,797 Net Assets 57,797

25
Surplus Account

N’000 N’000

Excess of assets over liabilities (i.e. Capital) Drawings Losses on Assets 4,000

Business 20,000 Furniture & equipment 22,800

Personals (w4) 4,800 Stock 1,600

Net Profit for the year 8,000 Bad debt 3,200

Gains on freehold Premises 12,000 Surplus as per Statement of Affairs 13,200

44,800 44,800

Note:

Although, the original question does not ask for the preparation of a Surplus Account nevertheless

it was prepared in order to be able to explain how the Surplus in the Statement of Affairs has arisen.

Working Notes

(W1) Cash at Bank N’000

Business cash at bank (given in the balance sheet) 2,400

Add personal cash at bank with Alawiye Community Bank 1,500

3,900

(W2) Unsecured Creditors N’000

Trade creditors (given) 43,200

Less: Preferential 3

Add: Personal liabilities 43,197

Due to domestic staff 400

Due to pools agent 1,000 1,400

44,597

(W4) Excess of assets over liabilities – Personal N’000

Personal Assets:

Car 4,000

26
Cash at Bank 1,500

Household equipment 700 6,200

Less: Personal liabilities

Due to domestic staff 400

Due to pool agents 1,000 1,400

4,800

Question 3

Madam Katakara commenced business on 1 st January, 1991 with a capital of N33,600: Her profits

for the years were as follows:

1991 N4,000

1992 N3,200

1993 N1,800

1994 N1,400

1995 N 400

Her drawing averaged N2,200 per annum. One 31st December, 1995 a receiving order was made

against, her when her affairs were as follows:

Unsecured creditors 20,000

Mortgage on freehold factory 4,000

Creditors, partly secured 12,000

(Security life policy estimated to be worth N4,000)

Wages and rates (preferential) 480

Bills receivable, discounted and expected to rank 3,200

Freehold factory cost N40,000 estimated to realize 20,000

Plants and Machinery cost N8,000 estimated to realize 2,000

Books debts: good N6,000; doubtful N2,000 estimated to realize N600; bad N5,000

27
Fixtures and fittings cost N800; estimated to realize 350

Stock-in-trade cost N8,000 estimated to realize 5,550

Cash in hand 80

From the following particulars:

(a) Prepare a Statement of Affairs and a Deficiency Account

(b) How much in the naira does the estate show?

Trustee in Bankruptcy

A trustee, according to the Oxford Dictionary of Current English, is a person or a member of a

board managing property in trust with a legal obligation to administer it solely for the purposes

specified.

The official name of a trustee in bankruptcy is “the trustee of the property of a bankrupt” (inserting

the name of the bankrupt). By that name the trustee may hold property, make contract, sue and be

sued, enter into any engagement binding on himself and his successors in office and do all other

acts necessary to be done in the execution of his office (Section 76).

As earlier explained, trustees are usually elected or appointed by the creditors, committee of

inspection or the court.

Note that, during any vacancy in the office of the trustee, the law allows the official Receiver to act

as trustee.

The major duties of the trustee are to keep records relating to the bankruptcy and to realize the

debtor’s assets so that they can be used to pay the creditors. Attention should be drawn to the fact

that when the assets of the debtor are being distributed, the trustee must ensure that the actual

expenses incurred in realizing the assets must first be deducted before any payment.

The order of payment is as follows:

(i) Cost and charges associated with the bankruptcy (Section 535(i)). These include;

28
 (a) The actual expenses incurred by the Official Receiver in protecting or attempting to

protect the property or assets of the debtor or any part thereof or expenses or outlay

incurred by him or his authority in carrying on the business of the debtor;

(b) The fees, percentages and charges payable to, or cost, charges or expenses incurred or

authorized by the official Receiver whether acting as Official Receiver or trustee.

(c) The taxed costs of the petitioner, so far as the same may not have been disallowed by

the court.

(ii) Debtor’s maintenance allowance (if any).

(iii) Expenses and the remuneration fo the trustee

(iv) Approved out of pocket expenses of the committee of inspection.

(v) Pre-preferential debts (these rank pari-passu) e.g.

(a) Proper funeral and testamentary expenses of a decreased debtor.

(b) Money or property in the bankrupt’s hands as an officer of a friendly society, or of a

Savings Bank.

(vi) Preferential Creditors

(vii) Unsecured Creditors

(viii) Deferred Creditors

(ix) Surplus (if any) to the debtor

The reader should note that secured creditors are paid out of the proceeds of their security.

Books to be kept by Trustee

A trustee is expected to keep the following records:

(1) A record book that give a record of proceedings throughout the bankruptcy. Thus, the

book contains records of the minutes of all meets, the resolution passed and particulars,

in order of date, as to how the estate has been administered.

(2) A Cash Book showing all receipts and payments.

29
 (3) A Trading Account kept on a cash basis. This is necessary in a situation where the

business of the bankrupt debtor is carried on.

When the trustee has completed his assignment and wishes to apply for his release, he must notify

in a prescribed form all creditors and the bankrupt debtor. This notice must be accompanied by a

Statement (in form of a Receipt and Payment Account) showing the position of the estate. This

Receipt and Payment Account) starts from the date of the receiving order to the close of the

bankruptcy process.

Separation of Money

The trustee is expected to pay all sum received by him into a separate bank account in the name of

the debtor’s estate. This account is sometimes called the Bankruptcy Estate Account. Any interest

received on the account forms part of the debtor’s estate. It must be emphasized that it is forbidden

for a trustee to pay any sums received by him as trustee into his own private banking account.

Section 88(2) of the Act says that if a trustee at any time retains for more than 10 days a sum

exceeding N500, and or such other amount as the court in particular case may authorize him to

retain, then unless he explain the retention to the satisfaction of the court,

(i) He shall pay interest on the amount so retained in excess at the rate of 20% per annum;

and

(ii) He shall have no claim to remuneration; and – B

(iii) He may be removed from his office by the court and

(iv) He shall be liable to pay expenses occasioned by reason of his default.

Remuneration of Trustee

This is usually fixed by the creditors or the committee of inspection. The remuneration is nature of

commission or percentage. One part of it is payable on the amount realized by the trustee after

deducting any sums paid to secured creditors out of the proceeds of their securities. The other part

30
is on the amount distributed in dividend. Note that cash in hand or in bank is not considered when

the trustee’s remuneration is to be calculated.

Illustration

From the following particulars, prepare the Trustee’s Account of Receipts and Payments to date of

first and final dividend.

Receipts:

Cash deposited with solicitor N1,500; cash in hand N2,250; cash at bank N15,600; stock

N1,312,500; furniture and fixtures N48,000; ………… bills of exchange N363,000.

Payments:

Court fees N22,950; law costs of petition N6,750; taxed cost of accountant and shorthand writer

N38,400; guarantee premium N1,950; (authorized by the committee to be paid out of the assets);

cost of notices in Gazette and newspapers N750; incidental outlay; postages, stationery, etc.,

N6,450; allowance to debtor N15,000; preferential creditors for rest N45,000; and rates, taxes, and

wages N36,000; trustee’s remuneration (as fixed by the committee of inspection), 3 percent on

N2,849,550 assets realized, and 2 percent on dividend distributed to unsecured creditors, whose

debts amounted to N5,829,150.

(Adapted from Carter’s Advanced Accounts by Douglas Garbutt)

Suggested Solution

TRUSTEE’S ACCOUNT OF RECEIPTS AND PAYMENTS TO DATE OF FIRST AND

FINAL DIVIDEND

Receipts Amount Payments Amount

N N

Cash deposited with 1,500 Courts fees 22,920

solicitor

Cash in hand 2,250 Law costs of petition 6,750

Cash at bank 15,600 Trustee’s Remuneration (as fixed by committee of 85,487

31
 Inspection 3% on N2,849,550

Stock 1,312,500 (assets realized) 2% on N2,973,013) 58,294

Furniture and 48,000 (assets distributed)(wt) Taxed costs of Account an 38,400

fixtures shorthand writer

Patents 375,000 Guarantee Premium 1,950

Book Debts 1,113,900 Costs of notices in Gazette and local newspapers 750

Bills of Exchange 363,000 Incidental Outlay – Postages, Stationery, etc. 6,450

Total Cost and Charges 221,03…

Allowances to Debtor 15,000

Preferential Creditors:

-Rent 45,0…

-Rates, Taxes & Wages 36,000

First and Final Dividend of approx.. 50k in then on 2,914,7…

N5,829,150

3,231,750 3,231,750

Workings

(w1) Percentage of Assets Distributed

This is determined by calculating of N2,973,013, the gross amount distributable between

unsecured creditors and trustee.

Composition

Composition refers to a legal arrangement between a debtor and his creditors whereby each creditor

agrees to accept part of his debt in full settlement of the whole of it. For example, if the creditors

accept 40k in the N (that is 40% that means that the creditor who is owed N20,000 will receive only

8,000 (N20,000). The rationale behind composition is that half a loaf is better than none.

32
Deed of Arrangement

This is explained comprehensively by Douglas Garbutt (1974: 2603) as a deed embodying an

arrangement arrived at between a debtor and his creditors to assign to a trustee for their benefit to

compound with them, and in certain circumstances, where the creditors obtain control over the

debtor’s property or business.

There are many advantages attached to a deed (of arrangement) such as:

(i) It enables a debtor to escape the publicity and stigma of bankruptcy;

(ii) The creditors obtained a larger dividend because the expenses consequent on

bankruptcy are avoided;

However, a deed of arrangement constitute an Act of bankruptcy, and a dissentient creditor may

present a bankruptcy petition against the debtor on the deed. Should be debtor be declared bankrupt

within three months of the execution of the deed, the latter becomes void against the trustee in

bankruptcy. As a result of this contingency, the trustee under such deeds generally allows months

to elapse before distributing any of the assets realized.

Deficiency Account and Profit and Loss Account Compared and Contrasted

The Deficiency Account is analogous to the Profit and Loss Account in many respects. It relates to

a period and reflects profits and losses just like the Profit and Loss Account. However, there are

some fundamental differences the two which are tabulated below:

Profit and Loss Account Deficiency Account

(1) This account is drawn up as part of (1) Deficiency account is drawn up for a

Financial statement of a going concern. bankrupt or enterprises to be

liquidated.

(2) The profit and loss account does not show (2) These are shown in the deficiency

the drawings or personal living expenses Account in that they reduce the assets

of the trader that would otherwise be made

33
 available for creditors.

(3) Personal assets and liabilities of the trader (3) It is necessary to bring in personal

are never brought in. assets and liabilities of the trader so as

to show how they have contributed to

the deficiency or surplus in the

Statement of Affairs.

(4) Profits and Loss Account usually supports (4) The main purpose of drawing up this

the Balance Sheet. account is to be able to explain the

deficiency (or the Surplus) in the

Statement of Affairs.

(5) The method of making entries in this (5) The deficiency account has its sides

account strictly follows the principles of reversed. Thus, losses and expenditure

double entry. It shows losses and are shown on the credit side while

expenditure on the debit side (left) and profits and gains are entered on the

profits (gains) on the credit side (right). debt side.

BANKRUPTCY OF PARTNERSHIPS

Generally the bankruptcy of a partner in a partnership although dissolves the partnership in respect

of all partners, does not necessarily make the firm bankrupt unless there is an agreement to the

contrary.

On the other hand, the bankruptcy of a partnership firm entails the bankruptcy of all the partners

(general) of the firm. This is due to the fact that all partners are jointly and severally liable for the

firm’s debts.

On the bankruptcy of the partnership firm, the trustee of the estate of the firm (joint estate) becomes

also the trustee of the separate estate of each partner. The Statement of Affairs with deficiency

Account prepared for the firm are separate from those prepared for the individual partners.

34
This is because district accounts must be kept of the joint and separate estates. The following are

the rules that must be followed when dealing with partnership bankruptcy:

(1) Separate creditors must be paid out of separate estates while joint credit must be paid

out of a joint estate.

(2) If there is a deficiency on the joint estate, and a surplus on any separate estate such

surplus must first transferred to the joint estate as an assets.

(3) However, the deficiency on any separate estate cannot be transferred to the joint estate

even if there is a surplus on the latter.

(4) Any surplus on the joint estate will be divided between the partners based on their rights

under the partnership agreement. Thus, the share of each partner will be included as an

asset of his separate estate.

(5) Where a partner has given personal security for a firm’s debt, the creditor is allowed to

claim from a joint estate and receive dividend therefrom in respect of the full amount of

his debt without bringing in or valuing his security. To make up the balance due to him

the creditor can then realize his security handling over any surplus to the separate estate

to which it belongs. For example, if a partnership has given personal security amounting

to N5,000 for a debt of N7,000 incurred by the partnership and the dividend received by

the creditor from the joint estate amounted to only N3,500 (50k in the N), the creditor

can claim the balance of N3,500 (i.e. N7,000 dividend received) by realizing the

personal security and returning the balance of N1,500 (i.e. N5,000 – N3,500) to the

separate estate of the partner who gave the security. It should be realized that the

creditor is not a secured creditor of the joint estate but of the separate estate as per the

decision in Re West Riding Bank. 1881 and Dutton Masse v. Manchester and Liverpool

Banking Co. 1924.

35
 (6) In the event of two or more partners personally guaranteeing a debt firm of the firm, the

creditor is allowed to prove in the joint estate and in each separate estate. Nevertheless,

he cannot receive in all more than what he is owed.

(7) Where the partnership assets had been pledged for the personal debt of a partner, the

separate creditor would claim as a secured creditor in the estate. If there is any surplus

then, it must be given back to the joint estate.

QUESTION 2

Joel and Joe filed their petitions in bankruptcy on 31 st December 1997. As at that date, their

statement of affairs shows the following:

N’000

Creditors:

Unsecured 75,000

Partly secured by lien on shares 40,000

Fully secured by lien on stock 100

Liability on bills receivable (estimated to rank N3,500,000) 7,000

Mortgage on mill 10,000

Creditors payable in full 3,000

Good 20,000

Doubtful and bad debt (estimated to produce N2,000,000) 10,000

Consignments, good 5,000

Stock (estimated to realize N40,000,000) 60,000r

Shares (cost and estimated to realize) 16,000

Bank 100

Bills of exchange 1,400

Mill of the value 11,000

Machinery (estimated to realize N12,000,000) 15,000

36
Fixtures (estimated to realize N1,500,000) 3,000

Cottages (estimated to realize N3,000,000) 3,500

On 1st January six years ago they had a capital of N50,000,000. Profits were made in the six years

of N20,500,000 after allowing interest on capital N10,000,000 and withdrawals amounted to

N63,600,000.

Required:

Prepare the Statement of Affairs and Deficiency Account.

[(12 marks) PE 1 Nov., 1998]

Suggested Solution

JOEL AND JOE

STATEMENT OF AFFAIRS AS AT 31ST DECEMBER, 1997

Gross Liabilities (as stated Expected Assets (as stated and Estimated to

Liabilities and estimated by to Rank estimated by9 debtor) produce

Debtor)

N’000 N’000 N’000 N’000

75,000 Unsecured Creditors 75,000 Bank 100

10,100 Fully Secured 10,000(w2) Stock (W1) 39,900

Creditors

Estimated value of 11,100(w3) Consignments 5,000

securities

Surplus to contra 1,000 Fixture (book value 1,500

3,000)

40,000 Partly secured 40,000 Machinery (book 12,000

Creditors value 15,000)

37
 Estimated value of 16,000 24,000 Cottages (book value 3,000

security 3,500)

7,000 Liability Bills 3,500 Debtors – Good 20,000

discounted

3,000 Preferential 3,000 Doubtful & bad 2,000

creditors 10,000 estimated to

realize

Deduct Contra 3,000

Bills of exchange 1,400

Surplus as per contra 1,000

Total or Gross Assets 85,900

Less Preferential 3,000

Creditors (per contra)

Net Assets 82,900

Deficiency 19,600

135,100 102,500 102,500

Deficiency Account

N’000 N’000

Capital 50,000 Joel & Joe Drawings 63,600

Profits (W5) 30,500 Bad debts 8,000

Deficiency as per statement of affairs 19,600 Losses on Assets

Stock 20,000

Fixtures 1,500

38
 Machinery 3,000

Cottages 500

Liability on bills

Discounted 3,500

100,100 100,100

Working

(W1) Stock

N’000

Estimated realizable value of stock 40,000

Less lien on stock 100

39,900

(W2) Fully Secured Creditors

N’000

Mortgage on mill 10,000

Creditors with lien on Stock 100

1,100

(W3) Estimated realizable value of Security in the hands of fully secured creditors

N’000

Estimated value of mill 11,000

Lien on stock 100

1,100

(5) Profits

Interest on Capital of N10,000,000 has been added back to the profits of N20,500,000 made in the

six years. This is because interest on capital does not reduce available assets.

39
40